Nordic Waterproofing Holding AB (publ) (NWG) Earnings Call Transcript & Summary

Welcome to the Nordic Waterproofing Holding audiocast with teleconference Q4 2021. Today, I am pleased to present CEO, Martin Ellis; and CFO, Per-Olof Schrewelius. [Operator Instructions] Speakers, please begin.

Thank you very much. Good morning, everyone. Very happy to have you on the call. Thanks for joining in. So I'll jump right into it. We have had, all in all, a strong year again. It's actually a record year, but just by a relatively minor margin over last year, which was quite good already. And we have achieved that in spite of the cost inflation you have seen and which we continue to see. Moving on to Page 2. If you take us, we have an increase in our net sales of 11% over last year, with 4% organic growth, that's basically sales price increases, 8% from acquisitions and a small negative currency effect of 2%. Our results both EBITDA and operating profit are up 13% over last year. And our cash flow from operating activities was weaker than last year. And the main reason is an inventory buildup, which is both in volume to make sure that we have enough raw material available and enough finished products available to deliver to our customers and also the cost inflation effect on the inventory values. The earnings per share are slightly up compared to last year, SEK 10.64. Moving on to Page 3. Looking at the quarter, we've had a solid quarter against the relatively strong quarter last year also. We have especially been able to increase our net sales by 16%. Most of that is acquisitions, 11%; and 5% is organic growth, which is all sales price increases and no currency effect. The results were flat basically compared to last year. EBITDA is up 4%, slightly up, and the operating profit slightly down. Cash flow, again, is weaker than the quarter in the year before for the reasons as I just described. Earnings per share also somewhat down, SEK 1.81 versus SEK 2.3 last year. Moving on to Page 4, a few highlights. All in all, as you know, we are on a very strong demand level, has been for the last 3, 4 years. That is still the case. So we don't see any downturn in the coming months. The roofing business has a stable demand for the high level. Installation Services, for our part, decreased slightly. Reasons for that are mainly still some delays on job sites and component shortages from the disrupted supply chain and also, to some extent, a disciplined approach on our side towards not accepting lower margin business. The business -- the Bitumen-based -- sorry, waterproofing business as well as SealEco showed double-digit growth, strong growth and probably some market share gains on top of the sales price effect. In prefabricated elements, we had slightly lower sales due to our Norwegian entity. But we continue to have strong order books in all markets -- market entrants . Our green infrastructure which said that will slow down in the beginning of the year showed positive organic growth again. In the installation services, we are talking about [indiscernible] are mainly generated in Finland, our net sales decreased by 7 percent. We're going to come back to the profitability level in that [indiscernible] more difficulty embarking on the cost situation in that segment compared to the industrial buildings and Products & Solutions. Moving on to Page 5. We have a slight decrease in the operating result and that is mainly -- it is entirely explained by the lower returns in the installation services. And in spite of the positive development in Products & Solutions. That has been achieved in spite of input cost inflation so we've been able to basically pass on all of our input cost inflation now to customers and will have a slight volume effect which is also cost inputs. The input cost inflation, as you know, has been dramatic than what we've ever seen in the past. And it has an effect on both business segments, of course. As I mentioned, in Products & Solutions, we've been able now to [indiscernible] all of that on Installation Services. We have seen a margin compression, it's a more fragmented market. So some competitors have a certain degree of nervousness and have had not been able to come with price increases to compensate. And right now, it's difficult to say when the situation will be totally absorbed. Our estimate will be maybe 6 to 9 months from now but there's no certainty about that. We have continued our acquisition drive, which we made 7 acquisitions last year. And we have already made 1 acquisition in the first quarter of this year. A company called Gordon Low Ltd (UK), which is a specialist fabricator and distributor of pond liners and other waterproofing membranes for the aquatic, landscaping, commercial water containment and agriculture sector. We acquired them on the 1st of February. And the strategic question now, I would say, is consumer integration at [indiscernible] for a number of years now and also introducing the Distri Pond, Gauri concept which we have started with originally in Belgium to the U.K. We believe there is also a swimming pond market in the U.K. to be served through this company. Moving on to Page 6. As I mentioned, stable demand at the high level. And we don't see any change in that. Basically when we look at our order books, SealEco products, which we distribute throughout Europe also strong amount. In some European countries, we continue to see market share gains of the material in Products & Solutions on waterproofing. We have continued strong growth in prefab facade and roof elements in our roofing elements business in Denmark, Norway and Finland so where we have Seikat company we recently acquired. So no doubts on the horizon there in terms of the demand and sales tool for green infrastructure. Growth rates in that business are not as high as in [indiscernible] profile and group element, but we continue to see... [Technical Difficulty]

Sorry for interrupting your presentation. Could you please shortly dial in your line again because we have badly sound interruptions of your side?

Okay. I can do that.

Thank you very much. I'm very sorry.

No worries. No problem.

Please continue with your presentation.

Yes. Thank you very much. So we spoke -- I'm sorry for the interruption. We spoke about the Golden Low, the acquisition, and we have now Slide #7. So specialist fabricator, using EPDM predominantly. The material we produce in SealEco, but also alternative materials like butyl and PVC to serve the predominant U.K. market. The company was founded 35 years ago, is headquartered in Bedfordshire, has 20 employees and an annual turnover of about GBP 5 million. And as I mentioned before, the company will allow us to extend the successful Distri Pond and Gauris concept to the U.K. Moving on, Palle, I pass it on to you.

Yes. Thank you, Martin. Then we move to Slide 8. As mentioned before, we had a net sales of SEK 890 million in the quarter here, up 16% versus last year. We see the organic growth is 5%, with a positive impact on price increases. So basically meaning that underlying volume development is slightly negative. The new acquisitions contributed with 11%. And on a yearly basis, we are now approaching SEK 3.7 billion turnover. EBITDA increased from EUR 93 million to EUR 97 million, while EBIT decreased from SEK 65 million to SEK 59 million. And the difference here is obviously the depreciation has increased. On a rolling 12 basis, the margin is 14.1% now for EBITDA. And it's basically, as we said, explained by a good and solid development in Products & Solutions, whereas in the Installation Services, we've seen a negative development, but I'll come back to that in a few slides. So moving on to Slide 9. We can see that the gross margin in the quarter was 26.1% versus 26.9% last year, and then we should bear in mind that we had a strong fourth quarter last year. And for the full year, we had an increase from 28.1% to 28.4%. And same for the EBITDA margin, that's down in the quarter from 12.1% to 10.9%, whereas an increase for the full year to 14.1%. And as a reminder of the negative development on net financial items also I think the third quarter, we did a significant update on earn-outs and valuations for the options to buy outstanding shares in the subsidiary as we do not wholly owned. And hence, a higher negative value this year than last year on that line. Then moving on to Slide 10 here. And here we can see that ROCE continues to be well above our long-term threshold level of 13%. We're currently at 16.6% at the end of the year. Our net debt-to-EBITDA ratio continues to be strong at 1.5x, even though higher than last year, we're still at a good position. And we should remember that we also have a weaker cash flow this year. We've done several acquisitions, and we also paid down significant dividend for both 2020 and 2019 during last year. Our interest-bearing net debt at SEK 677 million, still is in a good cash position and a strong balance sheet for further growth for acquisition as an example. Then moving on to Slide 11 and looking at the cash flow from operating activities. We can see that the operating cash conversion is lower in 2021 than it has been the previous 2 years. As commented here, the reduction is because of we have higher inventory, and it's partly higher input costs, but it's also a higher level of both raw material and finished goods to secure our capability to continue to deliver to our customers. And I also like to point out that the Board will suggest at the AGM a dividend of SEK 6 per share compared to SEK 5.50 for previous year. Then moving on to Slide 12 and looking into the Products & Solutions segment, where sales was up 13%, up to SEK 658 million in the quarter. Organic growth was 8% and acquisitions contributed with 5%. And we can say that basically the organic growth is, to a large extent, price increases where volumes are flattish, I would say, in this respect. Looking at the bitumen businesses in total, we have a good solid growth, but it differs a little bit by market. We can see, in Finland, the growth there is 10%, whereas acquisitions is 17%. So organic development is slightly negative, about 7%. Denmark strong for both prefabricated elements and the bitumen business. And a very strong development in Sweden with 23%. In Norway, we see a negative development with -- there it goes different ways, whether the weaker part is the prefabricated wooden elements. And for other -- the rest of Europe, we have a good double-digit growth there. EBITDA, good growth, up to SEK 100 million in the quarter compared to SEK 73 million last year. And the EBITDA margin increased from 12.4% to 15.2%. And for the full year, we're up at 18.3% now. Now then moving on to Slide 13, Installation Services, where the net sales has grown to SEK 249 million, an increase of 21%. Organic growth -- organic development has been negative with 7%, and it's mainly caused by continued delays on job sites due to component shortages from other suppliers than us. And also that we kept a disciplined approach towards not lowering our margins for the work we do. The impact from acquisitions is more significant in this segment with plus 30%. The EBITDA in the quarter decreased to SEK 1 million compared to SEK 24 million last year, and the margin is then obviously 0.4% compared to 11.7% last year. For the full year, on a rolling 12, we're now at 3.7%. And again, it relates -- the decrease in the result relates to the input cost inflation that we are a little bit later on passing on to our customers in this segment, the lower volumes and our disciplined approach. You can also note that we had some operational issues in 2 companies here, but they also have contributed to a lower result. With that, I'll move on to Slide 14, and back to you, Martin.

Yes. Thank you very much, Palle. And we conclude the presentation with our financial target structure. And we basically, for the full year, ticked again all the boxes, of course. So we did have sales growth, albeit volume growth was relatively flat. We increased profitability significantly beyond the 13% threshold we have in terms of ROCE. Well, as Palle mentioned, we are above 16% right now. Our capital structure, we are significantly below the 3x debt on EBITDA level, which we have defined as our target. And in terms of dividend policy, Palle mentioned the proposal of SEK 6 per share, which would be significantly above the 30% -- 50% level with the time . So thank you very much. Now we are looking forward to your questions.

[Operator Instructions] And we have the first question. It is from Cecile . Thank you.

I will start off with the Product & Solutions division. You mentioned that, on the group level, you had a 5% organic growth, but the volume growth or the growth driven from volume was slightly or neutral. Would you say that this is the case for all the product segments, i.e., the waterproofing, the prefabricated building element and also the Urban Green? or does it differ depending on these product segments? That's my first question.

Yes. Thank you very much. Yes, there are, I would say, slight differences. So we do have positive growth in the prefab elements. We probably have slightly negative in green infrastructure. And as I mentioned, that was predominantly the first 9 months. So we've seen an improvement there in the last quarter. And we're reasonably flat in waterproofing.

Right. And then would you say that the Urban Green product segment has been negatively affected during the quarter due to -- like they have seen a natural seasonal effect this quarter?

Yes. Seasonal effect are significant, obviously, in the fourth quarter. So it's difficult to talk about the trend. But we believe that we have lost some market share last year and also in the first half of this year. And we are now again on an uptick trend in terms of market share.

Okay. Do you have -- what is your estimated market share would you say in the Nordics or in Sweden?

In green infrastructure, yes, it's still a relatively fragmented market. So we might be talking about a 10% market share. So it's a market where we don't have the strong position we have in the waterproofing material, where we usually have up to 1/3 of the patent in each country. But what we see there is, we see obviously, it's still an attractive market, and we're looking at acquisition opportunities. And in the coming years, there might well be possibilities to increase our market share through acquisitions.

All right. And in the Installation Services, and -- have you continued to see this negative effect due to job delays from other parts in the beginning of 2022 as well? And yes, can you give some details is this really related only to external factors? Or do you see any hampering in the demand for your Installation Services? Or is it just longer lead times and the fact that it takes longer time to execute the services?

Yes. It's clearly the latter. So the underlying demand, we believe, continues at previous levels that a strong relatively high level in this cycle. So we have good order books going forward. But the component shortages, that's the situation, which is slowly improving, but it's still there. So I think we still see some effect of that and there should be some catching up probably during this year.

All right. And the negative effects on organic sales in this installation services, is that -- would you say is mainly due to this job delays? Or is it due to other external factors in the Finland market? Or what would you say is the main driver or the reason?

Yes. I think it's a combination, of course, but we do believe that we probably lost some points of market share because of our sort of disciplined approach to margin. And you can say that the other issue we have compared to product sales is that it's been difficult in that market to pass on the price increases. So there's a differential in Products & Solutions. We've seen a flat market in terms of volume at a high level, but we've been able to increase our sales prices sufficiently. In Installation Services, that's not been the case. So it's a more fragmented market. You have more players. Some of them tend to panic and in some cases, when you see the margin compression in that business and we'll take orders at a relatively low profitability level. So there has been an impact of that. But again, going forward, we are quite confident. We have a strong order book with sort of quite acceptable margins. So we really expect to see an improvement over the next 6, 9 months in that arena.

I see. And the margin, the margin pressure on the Products & Solutions division, do you see that, since your material costs continue to increase for every quarter by quarter, you see that you can compensate for the margin going forward as long as the material increases or the material cost actually stagnate or stay at the high level or?

Yes. We think that we've been able to pass on the past increases in our costs, and we are confident that with a certain time lag where if there are additional price increases, which we can't exclude, then we should be ultimately able to pass them onto customers. Right now, it's a bit of a mixed picture. Some raw materials are coming down slightly. And others are still increasing, and you will see some additional transport charges. So it's difficult to predict right now. But at the present moment, we don't have a dramatic increase in our costs.

All right. Okay. And my last question is about M&A. So you did the acquisition of Gordon Low. And this is quite a large distributor for you already, right?

Yes.

So in annual sales, how much would that be as an addition to Nordic Waterproofing in this acquisition?

Yes. Well, basically, most of the turnover will be additional as a bit of obviously, our raw material going into their costs, but that's not a huge number compared to their sales figure. And on top of that, we obviously want to develop the Distri Pond concept in the U.K., which after a while should increase Gordon Low sales.

All right. And sorry, perhaps one last question. So what do you see as the main synergies with this acquisition and perhaps with the Distri Pond operation in Benelux?

Yes. Well, I think Distri Pond has a very successful concept. And so we are going to copy paste that to Gordon Low. So that's essentially the main driver. To some extent, it's also a defensive move. You could argue because we historically have sold our materials to Gordon Low and being part of the group where we should not to lose that volume to a competing producer of EPDM sheets.

At the moment, there are no further questions. [Operator Instructions] And we received another question. Please introduce yourself shortly.

This is Max Bacco from ABG. So I have some follow-up questions on the previous ones. As you said, you do expect a recovery in the Installation Services segment in, say, 6 to 9 months. And according to my numbers, the full year EBIT margin for the Installation Services segment was 1%, 2021. What would you expect for 2022 given the ongoing recovery in that segment? Should we say somewhere around 3%, 4%, a bit below a normalized level?

Yes. That's pretty much what we believe. We had a bit of a combination of the -- now if you look at our Installation Services results, we have the Finnish contracting business, where we have basically the situation we described. We have a small effect from our Danish franchise companies, who also have had some margin compression because it takes more time and it's more difficult to pass on the input inflation. And we also have an exceptional element, which is 2 of our recently created or acquired companies have had operational issues, which we are, right now, trying to improve to turn around. And that has also had a significant effect, especially in the quarter. So as and when we turn these 2 entities around, we will also get an additional improvement of [indiscernible]. I'm talking about Byggpartner in Norway, which we acquired more than a year ago, and about Nordic [indiscernible], which was the coffee-based operation from a Finnish company, LA-Kattohuolto, which require 3 years ago to the Swedish market. And in these 2 operations, we've encountered some operational challenges, which we are in the process of solving.

Okay. Understood.

So all that together means that the figure you mentioned should be achievable.

Okay. Yes. Perfect. And one last question. You talked about this in a previous question as well. But I mean, the bitumen price has come up significantly, I mean, since December last year and also since the 2020 and 2021, and we are now on par with 2018 peak levels. I mean shouldn't this be notable in the Product & Solutions segment going forward? Or are you able to increase your prices to offset this fully and defend your high margins?

Yes. The short answer is yes. And I think we've sort of demonstrated that last year, and right now, we don't see any reason why that should not be valued also this year. So we are confident on that issue.

There are no further questions. I would like to hand back to you, gentlemen.

Okay. So thank you very much for attending. It's been a pleasure and look forward to speaking again latest in 3 months' time. Thank you very much. Have a good day.